Uncertainty is holding back investment in North East offshore sector

Following a week of highs and lows in the offshore wind sector, Peter McCusler assesses the state of the industry

Share

Anna Gowthorpe/PA Wire

An offshore wind farm

As offshore wind turbines head into deeper North Sea waters the financiers being asked to invest hundreds of millions of pounds in the industry still have many concerns.

Government policy uncertainty, the performance and cost of turbines, and the 15-year leases being asked of turbine manufacturers by landowners all trouble investors.

Nevertheless, German company Siemens, a business with deep pockets, signalled its confidence in the industry when it and the Port of Hull announced a joint £360m investment in blade manufacturing and assembly facilities on the Humber last week.

Almost all of the UK’s installed turbines have been supplied from Germany and Denmark so the Siemens’ announcement was a welcome boost for the industry and Government.

Matthew Knight, director of strategy at Siemens UK, said the recent announcement of the “strike prices” for offshore wind and its own visibility on orders over the next few years meant the time was right, declaring it a “landmark moment” for the industry.

But the following day utility SSE scrapped plans to invest £20bn in four major offshore wind projects and cast doubt on the viability of the sector.

SSE said the limited subsidies, high costs and predicted low returns meant it is not sufficiently attractive for it to invest.

Maria McCaffery, chief executive of Renewable UK, the trade body for the renewable industry, said: “This announcement demonstrates very clearly the need for the Government to provide greater confidence for investors in its long-term support for Britain’s offshore wind industry.

“If we could rely on more certainty and less risk, firm commitment to the huge financial investments involved would secure all the economic benefits of energy independence in a shorter timescale.”

SSE’s volte-face came on the same day Ofgem said it would conduct a two-year competition enquiry into the industry, with Centrica boss Sam Laidlaw saying the review will delay vital investment in all forms of energy production – and could lead to blackouts.

Centrica had already pulled out of offshore wind, as has the renewables division of Scottish Power, which said it could be 10 years before the sector becomes attractive.

As things stand the UK currently has more installed offshore wind capacity at 3.6GW than the rest of the world combined – and a similar amount of capacity is coming through the system.

These have been brought forward under the previous subsidy regime, and at sites closer to the shore known as Round 1 and Round 2, and could be funded from a developer’s balance sheet.

But the next stage in the industry’s growth – known as the Round 3 sites, further from the shore and technically more challenging – are where the big money and potential economic benefits are, and these require additional support from the financial community.

Four of the five are in the North Sea, including the three largest Round 3 sites; Dogger Bank, Hornsea and East Anglia. These will require a total of 5,000 turbines of at least 6GW each, costing £10m a piece. The Round 3 sites are capable of generating almost 20GW of power, or one-third of the nation’s current electricity needs.

One of the key drives of the industry to date has been the UK’s renewable energy target and the generous subsidies to support its growth.

The UK is currently well short of its 15% renewable energy target by 2020, at around 5% in 2013. Offshore wind is the most scalable technology and has received some of the largest subsidies.

The Government says it wants to see a minimum 10 GW of offshore wind capacity by 2020, and late last year set generous strike prices of £155 per MW/h to support it.

Based on this level of Government support to 2020 then Siemens must have felt it was time to press the button after around seven years deliberation.

However looking beyond 2020 the policy landscape is less certain, as are the prices to support it. The current £155 strike price per MW/h tapers down to £140 per MW/h from 2019 onwards as the Government puts the industry under pressure to reduce costs.

New EU renewable targets to 2030 are likely to be set at a European-wide, as opposed to a national level, following intense lobbying by David Cameron. This has been seen by some as opening the door for the development of a UK shale gas industry.

This policy uncertainty unnerves investors and these fears were further heightened by last month’s Budget, which froze the Carbon Price Floor, damaging the financial models supporting offshore wind.

Charles Reynard, corporate partner, clean energy and sustainability team, at Eversheds law firm in Newcastle, says cost constraints at the utilities, uncertainty as to the status and trajectory of fracking for shale gas and regulatory uncertainty are playing on the minds of investors.

He said: “While strike prices have been set at £135 per megawatt hour in 2018/19 for offshore wind, for example, these projects have long-term gestation periods and developers have no clarity for 2020 and beyond as yet.

“The Government has said the costs need to come down and it will undoubtedly go for the most cost-efficient, but the market needs to be technologically mature in order to make these decisions and that is not yet the case for all renewable technologies.

“The signals from the Government are positive overall and the recent Siemens announcement is a very welcome development, but there is still a degree of uncertainty and, for various reasons, certain publicly announced projects are being scaled back. I hope that the Siemens announcement will create the additional momentum that Round 3 currently requires”

Dr Alan Lowdon, North East-based offshore wind advisor and Visiting Professor at Durham University’s Durham Energy Institute, has highlighted how investors have concerns over technology costs in an industry which has yet to standardise production processes.

He continued: “SSE’s decision to put its foot on the brakes in relation to offshore wind is, of course, disappointing given the superb support that it has shown to the sector in recent years.

“It is not, however, a total surprise given the risk of exposure that a vertically integrated business such as SSE carries. It is important to balance this risk and play to one’s strengths as a result. At the moment, SSE clearly sees the element of risk around offshore wind as one that it prefers to park.

“I don’t think it is a coincidence that this news comes in the same week as the Ofgem inquiry announcement. Faced with the potential dismantling of its vertically integrated structure, and all of the cash-flow and balance sheet uncertainties which would result, the company could simply need some breathing space.”

However Knight, of Siemens, added: “The renewable targets to 2020 have helped, and further targets beyond 2020 would be nice, but both Britain and Germany have strong plans for the future of offshore wind, and a renewable target per nation is not essential.”

McCaffery said that if other manufacturers are to follow Siemens in deciding to build a wind turbine factory in the UK “they need to know that there will be a long-term market up to 2030 and beyond”.

Andrew Hodgson¸ chairman of industry body Subsea North East, chief executive of subsea engineering business SMD and board member of the North East Local Enterprise Partnership, said: “I still think there is a great future in offshore wind.

“It will be an important part of the energy mix in the years to come, but it’s just taking a lot longer as there are still a lot of uncertainties in relation to the price of energy and the type of energy we want as a country.

“Next year’s General Election is only adding to that uncertainty.

“There was a feeling of optimism in 2012 but that went away and there has been a variety of Government announcements, but overall they don’t add up to that much. The operators are working with their existing assets and are not prepared to invest in additional capacity.

“We don’t have any certainty on long-term targets as there is still uncertainty over potential changes in Government policy.”

Andrew Mill, chief executive of the National Renewable Energy Centre (Narec), in Blyth, remains upbeat, he said: “The offshore wind industry has enjoyed a record breaking year in terms of new deployment and installed capacity.

“This latest announcement that Siemens is to invest £160m in wind turbine production and installation facilities in the UK is a fantastic boost for the industry and a great vote of confidence for a growing sector.

“Having one of Europe’s leading wind turbine manufacturers invest in the UK market will have a huge impact on, and help to strengthen and develop a home-grown supply chain, enabling the industry to reduce costs and achieve its offshore wind goals.”

Technology and cost

Major efforts are underway to reduce costs in the offshore wind sector with the Government saying it aims to see reductions in subsidy levels of up to 50% from 2020 onwards.

DONG Energy is the largest player in the European offshore wind sector. Benj Sykes, its operations director for energy renewables in the UK, told Journal Energy: “The industry is under increasing pressure from the Government to show it can bring costs down which may explain why a number of schemes have fallen by the wayside in recent months.

“Building a supply chain will help bring costs down. We believe we are capable of bringing costs down by 30 to 40% to £100 per MW/h. In fact DONG wants to go further and is looking at €100 per MW/h.

“We are currently trialling 8MW turbines and these will drive down the costs. The industry needs to earn the right to exist on a large scale.

“There are still uncertainties, but we are pretty confident. If we show as an industry we can get our costs down then the opportunity is there for the taking, but we have to earn the right to grow as an industry.

“We can create a big industry here in the UK for foundation and turbine manufacturers and the supply chain.”

Matthew Knight, of Siemens, believes £100 per MW/h is definitely achievable, highlighting how there are three main elements factored into cost; the capital costs, the operation costs and the financial costs, with the latter including a large premium for risk right now.

He said: “As the turbine manufacturing process becomes more industrialised, is scaled up then the financial risk is reduced and costs will come down.”

The National Renewable Energy Centre (Narec) based in Blyth, is heavily involved in improving offshore wind technology.

In Newcastle last week it hosted a conference to assess progress on its Offshore Wind Innovation Programme – an £11m Government Regional Growth Fund scheme.

This has brought together offshore market leaders with world-class technology providers and academia to deliver six major technology projects addressing key technical challenges associated with the offshore wind supply chain.

Tony Quinn, operations director at Narec, said he believes a 30% reduction in costs is achievable as new technologies develop, the manufacturing process become more automated, drawing in economies of scale, and more competitors enter the market place.

AS well as Siemens four of the world’s main turbine players have signalled their intent to establish factories at UK ports.

French firm Areva, Spanish firm Gamesa, Mitsubishi of Japan and Korean outfit Samsung all favour Scottish ports, however none have yet committed, with the length of leases required said to be a major drawback.

Industry insiders tell The Journal that many of the turbine companies want leases of no more than five years, but the ports, which will have to make substantial investments in berths and other infrastructure, need a 15-year timetable to make it work for them.

One industry expert said: “The strike prices have been set, and the Government wants local content in the supply chain. But the turbine manufacturers looking at building factories in the UK are being put off by the length of leases they are being asked to sign.

“If it was a five-year lease that wouldn’t be a problem, but a 15-year lease is, and if the market does not develop in the way expected this would add insult to injury.

“While the Government has shown its commitment to renewable targets up to 2020, there is no visibility beyond then.”

Associated British Ports has agreed to invest £150m upgrading its port facilities as part of the Siemens deal, although details of the length of lease agreed between the two parties has not been released.

However Knight said: “We are looking long-term. It would not make business sense to start a factory up and close it down. It is not that kind of industry, and we are not that kind of company. We want to build a long-term viable industry in the UK and Europe.”